C-234/01

1 — Original language: French. 2 —BGBl. 1960, p. 1782.

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The deduction at source shall be 25% of calendar year, have been subject to German the income received...' income tax, or the income not subject to German income tax during the calendar year must not exceed DEM 12 000.

4. The income referred to in Paragraph 50a(4) of EStG 1996 includes all receipts by the taxable person in money or in 7. Persons exercising this right are then money's worth, with no deductions subject to the same rules under EStG 1996 allowed for business expenses, extraordi- as wholly taxable persons. Under German nary expenses and taxes. law, the latter are assessed in respect of income from a self-employed activity on the basis of net profit (receipts less actual expenses). Furthermore, a progressive tax scale applies to their earnings, which incor- porates a non-taxable basic allowance. 5

5. By virtue of the deduction of tax at source, the income tax is, in principle, treated as definitively paid. No provision is made for refunds. 3 The only possible exception is where business expenses amount to more than half of receipts. 4 II — Facts of the case and main proceed- ings

10. By virtue of the treaty concluded between the Kingdom of the Netherlands and the Federal Republic of Germany in order to avoid double taxation, income earned by Mr Gerritse in Germany is subject to income tax in that Member III — The question referred State. Under German law, such tax levies are deducted at source and are calculated by applying a flat rate of 25% to the gross income. 14. The Finanzgericht Berlin has decided to stay proceedings and has referred the following question to the Court for a preliminary ruling:

15. Like Mr Gerritse and the Commission of the European Communities, I consider that the question referred by the Finanz- gericht Berlin should be interpreted as relating to Article 59 of the EC Treaty (now, after amendment, Article 49 EC) and not to Article 52 of the Treaty 9 inasmuch 18. In the light of these considerations, the as a situation such as that in the main question referred should be understood as proceedings falls, by virtue of the tempor- seeking to ascertain whether national legis- ary nature of the self-employed activity lation on income tax which, as in the exercised by the plaintiff, within the scope present case, treats residents and non-resi- of the Treaty provisions concerning the dents differently is contrary to Article 59 of freedom to supply services. 10 the Treaty. Under that legislation, the income of residents is taxed in accordance with a progressive scale incorporating a non-taxable basic allowance while that of non-residents is taxed at a flat rate; more- over, residents are taxed on their net 16. It should be remembered, first of all, income, after deduction of their business that under German law different tax rates expenses, while non-residents are taxed on apply to the income of wholly taxable their gross income, with no deduction of persons on the one hand, that is to say such costs. residents, and that of partially taxable persons, that is to say non-residents, on the other. Specifically, German law pro- vides for the application of progressive tax rates, with a non-taxable basic allowance, in the case of residents and a flat rate of 25% in the case of non-residents. 19. It is settled case-law that 'although, as Community law stands at present, direct taxation does not as such fall within the purview of the Community, the powers retained by the Member States must never- theless be exercised consistently with Com- 17. Secondly, German law deals differently munity law'. 11 It follows that the Member with business expenses depending on States, in the exercise of the powers whether the income concerned is that of a resident or a non-resident. More particu- 11 — See Case C-279/93 Schumacker [1995] ECR I-225, para- graph 21, Case C-80/94 Wielockx [1995] ECR I-2493, 9 — See Case 35/85 Tissier [1986] ECR 1207, paragraph 9. paragraph 16, Case C-107/94 Asscher [1996] ECR I-3089, paragraph 36, Case C-391/97 Cschwind [1999] ECR 10 — See Case C-55/94 Gebhard [1995] ECR I-4165, paragraph I-5451, paragraph 20, and Case C-55/00 Gottardo [2002] 39. ECR I-413, paragraph 32.

24. Thus, national rules which apply irre- spective of the nationality of the taxpayer A — On the flat rate of tax of 25% concerned but which draw a distinction on the basis of residence in that non-residents are denied certain benefits which are, conversely, granted to persons residing within national territory are liable to 21. In the first part of the question referred, operate mainly to the detriment of the national court asks whether national nationals of other Member States, non- legislation on income tax which, as in the residents being in the majority of cases present case, taxes the income of a resident foreigners. 15 and that of a non-resident differently, the former being taxed in accordance with a progressive scale incorporating a non-tax- able basic allowance and the latter being taxed at a flat rate, is contrary to Article 59 of the Treaty. 25. It is also settled law that discrimination can arise only through the application of 12 — See Case C-204/90 Bachmann 11992] ECR I-249, para- graph 31, and Case 300/90 Commission v Belgium [1992] ECR I-305, paragraph 22. 14 —See Case 152/73 Sotgiu [1974] ECR 153, paragraph 11, 13 — See Case C-136/00 Danner [2002] ECR I-8147, paragraph and Case C-330/91 Commerzbank [1993] ECR I-4017, 29. See also the judgment in Case C-381/93 Commission v paragraph 14. France [1994] ECR v-5145, paragraph 17. 15 — See Schumacker, cited above (paragraph 28).

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different rules to comparable situations or application of different rules in a case such the application of the same rule to different as this. 19 That difference in treatment must situations. 16 not however call into question the freedom to supply services or place Mr Gerritse at a disadvantage.

16 — Ibid, (paragraph 30). 17 — Ibid, (paragraphs, 31, 33 and 34). 19 — See, in this connection, the judgments, cited above, in Schumacker (paragraphs 36 to 38) and Asscher (paragraph 18 — See the judgments, cited above, in Wielockx (paragraph 42). 18), Schumacker (paragraph 31 et seq.), Asscher (para- graph 41), Cschwtnd (paragraph 22) and the judgment in 20 — See its written observations (p. 3). Case C-87/99 Zurstrassen [2000] ECR I-3337, paragraph 21 — See its written observations (point 10). 21. 22 — See its written observations (points 31 and 32).

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GERRITSE

36. Secondly, the Commission has demon- strated convincingly in its written observa- tions 26 that application of the progressive scale provided for in German law to the 33. As regards the amount of the flat rate income earned in Germany by Mr Gerritse of tax, set at 25% in this case, I draw would result in a rate comparable to the attention to the judgment in Asscher, in 25% flat rate that was applied in his case. which the Court ruled that non-residents cannot be expected to pay tax at a higher rate than residents, at least where the income earned by the non-resident in the State in which the economic activity con- cerned is pursued is taken into account in the application of the progressive scale in the State in which he resides. 24 37. More specifically, the Commission cal- culates that in the case of Mr Gerritse, having regard to his net income and the tax scale under EStG 1996, the average tax rate would be 26.5%. The Commission rightly concludes that, at such a rate, discrimi- 34. Both these conditions are met in the nation cannot be said to obtain. In the case present case. of Mr Gerritse, the 25% rate to which he is

23 — See the judgments, cited above, in Schumacher (paragraph 25 — See the Netherlands' Government's replies to the questions 32) and Gschwind (paragraph 22). put by the Court (p. 2). 24 — Paragraph 45 et seq. 26 — Point 27 et seq.

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subject under EStG 1996 does not place business expenses while the latter is taxed him at a disadvantage in relation to a on his gross income with no deduction of resident subject to the progressive scale. such costs is contrary to Article 59 of the Treaty.

42. I stressed earlier that in the area of direct taxation it is possible for a Member State to apply different rules to residents on B — On the deductibility of business the one hand and non-residents on the expenses other. The rules applying to non-residents must not however place them, in the pursuit of their activity, at a disadvantage in the light of Community rules. 39. It should be remembered, as a first point, that under EStG 1996 residents are assessed on the basis of net income after deduction of business expenses and non- residents on that of gross income with no deduction of such costs. 27 43. In this case, the disadvantage which Mr Gerritse claims to have suffered on account of the difference in treatment under Ger- man law is obvious. 28 As he is unable to deduct from his income the business and other expenses actually incurred in con- 40. In the second part of its question the nection with his activity, Mr Gerritse is national court making the reference seeks taxed on a higher amount than residents, to ascertain whether national legislation which, as in the present case, taxes the income of a resident and that of a non- 28 — See also, in this connection, Molenaar, D., Obstacles for International Performing Artists', European Taxation, resident differently in so far as the former is volume 42, issue 4, April 2002, p. 149, and in particular p. 150 and p. 151. The author draws attention to the taxed on his net income after deduction of official commentary on Article 17 of the Model Double Taxation Treaty drawn up by the Organisation for Economic Cooperation and Development (OECD) and the reference to the deduction of business expenses in the 27 country in which the activity is exercised. The OECD is — The present case involves income with no deduction of however, as the author points out, careful not to indicate business expenses. Paragraph 50(5)(4){3) of EStG 1966 how such deductions should be made. The author refers does, as we have seen, make provision for the reimburse- also to the view expressed by Professor Sandler at an IFA ment of business expenses but only where those expenses Congress in Cannes in 1995 that the non-deductibility of amount in aggregate to more than half the income. professional expenses constitutes a significant obstacle.

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V — Conclusion

51. I therefore propose that the Court should give the following answer to the national court's question:

(1) National legislation on income tax which, as in the present case, taxes the income of residents and that of non-residents differently, the former being taxed in accordance with a progressive scale incorporating a non-taxable basic allowance and the latter being taxed at a flat rate, is not contrary to Article 59 of the EC Treaty (now, after amendment, Article 49 EC).

(2) On the other hand, national legislation which, as in the present case, taxes the income of a resident and that of a non-resident differently in so far as the former is taxed on his net income after deduction of business expenses while the latter is taxed on his gross income with no deduction of such costs, is contrary to that Article.